The battle for Safeway raises an old but important question: is it better to be a private company than a public one?

NOTHING in business beats the thrill of a good old-fashioned takeover battle. And the fight to win Safeway, Britain's fourth-largest supermarket chain, seems destined to become a classic. After Safeway's management agreed to a friendly merger for £2.6 billion ($4.2 billion) with a rival, Wm Morrison, on January 9th, no fewer than five other potential bidders have emerged, so far, and the firm now says it no longer recommends the original offer to shareholders. Journalists, bored by worthy stories about corporate governance, are cock-a-hoop, along with London's investment bankers. Some are even daring to hope that the exuberance over Safeway will be infectious, bringing about the return of those animal spirits whose absence from the executive floor was recently bemoaned by Jack Welch, former celebrity boss of General Electric.

Such hopes are premature, at best. But the bidding for Safeway may highlight a somewhat different trend in corporate ownership: the growing attraction of taking public companies private. Although four of the six firms said to be interested in buying Safeway are its publicly traded rivals—Wm Morrison, Wal-Mart (which owns Asda, Britain's third-biggest supermarket chain), J. Sainsbury (number two) and Tesco (one)—the other two want to take the firm private. One is Kohlberg Kravis Roberts (KKR), a private-equity firm that achieved notoriety in the late 1980s with its leveraged buy-out of RJR Nabisco, mythologised in “Barbarians at the Gate”. The other is Philip Green, a controversial British businessman who achieved notoriety in 1992 when institutional investors forced him to quit as boss of Amber Day, a publicly traded retailer, after its share price plunged, but who has since made a fortune as a private investor, buying up two once-quoted retail chains, BHS and Arcadia. Yet another private investor, Texas Pacific, may also be mulling a bid.

Although the number of public firms going private fell last year, along with other corporate capital-market activity such as initial public offerings (IPOs) and mergers and acquisitions (M&A), the drop from the peak has been much smaller than the drop in offerings and mergers. In Europe, for instance, the volume has ranged between euro10 billion ($11 billion) and euro14 billion in the past four years, and the number of deals between 20 and 45, says Bridgepoint Capital, a venture capitalist.

Moreover, whereas the bursting of the bubble is likely to depress demand for IPOs and mergers for years, it has probably made the case for going private stronger than it has been since the 1980s. In the 1990s, capital was available in effect free in the stockmarkets, and it was a foolish firm that did not get some by going public. Now, that capital has dried up. Many firms now trade at such depressed prices that it may be equally foolish to remain public.

And, whereas most of the firms that have gone private in the past few years have been relatively small, in recent months some bigger deals have taken place, and even bigger ones have been mooted. Alastair Gibbons, deputy chief executive of Bridgepoint, which has taken 11 firms private and is looking at several more, now sees ever larger firms going private. Increasingly, they are in continental Europe. And in Britain last year, Southern Water was taken private for £2.1 billion and Brake Brothers, a catering firm, followed for £600m. Tom Hunter, a wealthy investor, wants to take House of Fraser private. Rumours suggest that investors are also sniffing around the JJB Sports chain, Mothercare, Matalan, a fashion group, and even Boots, a chemists—all quoted.

In America, Dole Foods, a fruit giant, delisted after a $2.5 billion buy-out by its chairman last December. There have also been more private sales of bits of big companies, such as Diageo's recent sales of Burger King to Texas Pacific. In some cases, this reflects a need for firms to raise capital fast; in others, an attempt to raise their share price by becoming more focused. In either case, a private sale now makes more sense than an IPO. Robert Kindler, global head of M&A at J.P. Morgan, expects more of the same: “Private equity deals surged 64% in 2002, so I think we'll see a lot more going-private deals this year.”

Misery in the market

There are other good reasons to be private. After three years of falling share prices, and with fund managers and share analysts focusing on bigger, more fail-proof firms, many well-run, profitable firms trade cheaply, often below the book value of their assets. At such prices, a big reason for being quoted—the ability to raise capital—scarcely applies. Nor is there much chance of making an acquisition using the firm's shares as currency. Roger Carey took Saville Gordon, a property firm, private last August in a £500m buy-out after 35 years on the stockmarket: “We were exceeding on all fronts. We had great returns, tremendous growth, but investors were not listening—it was like talking to a brick wall. Our shares were at a 40% discount. It was totally demoralising,” he says.

According to Roberto Quarta, a partner at Clayton, Dubilier & Rice, “Managers come to us and say ‘it is wholly unfair. Compare our performance and our share price.'” Buy-out funds, by contrast, mostly take a long-term view, freeing firms from the pressure of quarterly profit targets. Better still, unlike the public markets, private investors, especially private equity funds, have money. Charles Milner, head of KPMG's private equity group, says that they are “flush with funds and are very actively looking at businesses”.

“Managers see going private as an opportunity to get rich”

Financial buyers are not only prepared to pay cash for deals. They will also reward the target firm's managers—often the existing, demoralised lot—that way. At a time of underwater stock options and complicated incentive plans for public bosses, cash has great attractions—a fact that Mr Green, the would-be Safeway buyer, insists helped him to win the enthusiastic backing of executives at Arcadia and BHS after he took control. Bridgepoint's Mr Gibbons puts it bluntly: “Managers see going private as an opportunity to get rich.”

Bosses of private firms also have greater control and face less tiresome scrutiny—something that will seem even more tempting as the latest round of corporate governance reforms take effect in public firms. Martin Lipton, an American corporate lawyer, says that going private can give managers the freedom to make hard strategic decisions, such as selling a failing division at a loss, that would be punished on the public markets. At the same time, the carrot of an ownership stake and the pressure of having to repay debt either to the banks or to a venture capitalist concentrates managers' minds on the job. That is why David Arculus, who once led the buy-out of Reed Elsevier's consumer-magazine arm IPC, calls taking firms private “the purest form of capitalism. It tests your mettle and drives you to superior performance.”

Freedom from interference clearly motivates many bosses who go private. Mr Green, who is scathing about Britain's latest corporate-governance sally, the Higgs report (see article), proudly declares: “We haven't anyone else to satisfy but the banks.” Institutional investors who once forced him out of Amber Day may be equally grateful for not having to oversee him.

And, as the baying for corporate blood intensifies, being private has another advantage—freedom from shareholder lawsuits. Mr Lipton estimates that liability-insurance costs for directors and officers in America have quadrupled in the past year.

True, removing firms from public scrutiny could increase their ability to engage in reckless or even fraudulent business practice. But at least that would hurt only professional financiers, not small shareholders. Anyway, given the past two years, it is hard to argue that public companies have been models of probity either.